Can 2020 be the right year for CBDCs?
Many central banks are developing projects to introduce own cryptocurrencies, and year-2020 could be the right year to observe the first examples. J. Christopher Giancarlo, the ex-chairman of the Commodity Futures Trading Commission has established the Digital Dollar Foundation to studying and promoting the introduction of a digital USD. The aim of his think tank is launching the Digital Dollar Project and develop a US Central Bank Digital Currency (CBDC).
On the project, Giancarlo told crypto reporter Niranjan Patil: “The digital 21st century is underserved by an analog reserve currency, a digital dollar would help future-proof the greenback and allow individuals and global enterprises to make payments in dollars irrespective of space and time. We are launching the Digital Dollar Project to catalyze a digital, tokenized U.S. currency that would coexist with other Federal Reserve liabilities and serve as a settlement medium to meet the demands of the new digital world and a cheaper, faster and more inclusive global financial system.”
But despite US efforts, is China to have currently a competitive advantage in the CBDC business. People Bank of China, the Chinese central bank, has recently published the Outlines of ‘DCEP’ (Digital Currency Electronic Payment). Huang Qifan, the vice chairman of the China International Economic Exchange Center, explained that “the currency is not for speculation. It is different to bitcoin or stable tokens, which can be used for speculation or require the support of a basket of currencies.”
The European Central Bank is also speeding up its plans for a CBDC to promote the digital euro and Russia could test a state-backed digital currency soon, with the sovereign state considering issuing a digital currency backed by gold.
International watchdogs are also opening the doors to the new currencies. The UN secretary-general, Antonio Guterres said his organization must embrace the blockchain technology going forward, Forbes reports. The IMF has also explained the benefits of CBDCs in its blog, as some countries are dynamically piloting the projects to explore the scope and the feasibility of CBDC. To do so, they have increased resources allocated to CBDC and fintech research at the central bank, sometimes in partnership with private sector advisors. On this perspective, quite a few nations are also reconsidering their legislation to fortify CBDC prospects in case it were issued. IMF also appeared to have figured out some key elements in which the authorized bodies can be of assistance to nations looking to launch their own CBDC.
Bitcoin is recording its most profitable start to a year since 2012
Bitcoin, with a market capitalizazion of $162B (source: CoinMarketCap.com), has risen +23.0% so far this year, after a stunning +87.0% gain in 2019. U.S-Iran dispute was one of the main driver of the increase. The largest cryptocurrency by market capitalization was trading close to $7,000, a little less than 50.0% off its 2019 high above $12,000, before the U.S. air strike. Soon after the attack, Bitcoin rose above $7,200 and has gained almost +30.0%, at $8,913 as of Friday morning.
Bitcoin halving, which is expected for the next May, is another reason able to explain the increase. Bitcoin halving happens roughly every four years, the amount of new bitcoin coin mined in each transaction is cut by 50%.
The Chicago Mercantile Exchange’s launch of bitcoin options and a technical indicator pointing to more gains have aided the cryptocurrency’s rise, too. Global central banks’ expansionary monetary policies are also helping the devaluation of sovereign currencies and forces investors to bet on more profitable asset classes, as cryptos. The Fed cut interest rates in the second half of 2019 and has restarted purchases of Treasury securities. The European Central Bank and the Bank of Japan are also following ultra-expansionary monetary policies. Liquidity created by central banks and pumped into the tech sector is sustaining the crypto market, and that’s why riskier crypto assets are outperforming bitcoin, with some doubling or even tripling this year.
Despite this year’s gains, bitcoin has yet to approach its 2017 high of about $20,000, a peak followed by a plunge to $3,400 in 2018, prompting increased government scrutiny. Nouriel Roubini, who predicted the 2008 financial crisis, told the Senate Banking Committee in late 2018 that cryptocurrency represented the “mother of all scams.”
Digital Yuan and its impact on banking
As reported by many sources, China is ready to issue its crypto yuan, a national digital currency backed by the People’s Republic of China. Bloomberg’s Andy Mukherjee thinks the new digital currency could change “banking as we know it” and the implications extend far beyond that. If the crypto yuan bet would be won by China, this could disrupt the global system of floating exchange rates, undermine the US dollar supremacy at the center of that system, elevate China’s global economic power and enable the country to monitor who is transacting what business and who receives loans.
“If the central bank wants to see who’s spending where, it can,” Mukherjee writes. “Anonymity disappears when cash does. While that will make life difficult for money launderers and terrorists, it could also become a tool to punish political activism. Meanwhile, currency as a foreign policy weapon loses some sting. Pariah states will covet a crypto they can access by circumventing banks that are terrified of flouting Western sanctions.”
To date, most cryptocurrencies have remained outside the national governments’ interests, despite Bitcoin revolution, and the adoption of enterprise or private blockchains used by a group of allied companies, for monetary transactions and other business dealings.
Investment banks have also started to jump into the business. JP Morgan launched its token ‘JPM Coin’ last February, which along with the major cryptos, is used for interbank transfers to save time and money. Money is converted to tokens, transferred and then converted back to money.
As reported by Bloomberg, it “may be that technological progress is making the status quo untenable. It’s no coincidence that China hastened its national cryptocurrency after Facebook Inc. announced the Libra project, which was touted as an alternative dollar. Perhaps that was fanciful, and the Libra has hit a wall of regulatory concerns. But if they’re offered like Spotify gift cards at the local 7-Eleven, there will be demand for tokens that are acceptable across borders, stable in value against baskets of national currencies, and can be used in global trade and investing.”